Eurozone Round-Up

No surprises this morning as the Bundesbank has slashed the German growth forecast to 1%. This has followed the past few months where there has been tangible uncertainty about Germany’s macroeconomic vision. With criticism coming from those suggesting that Germany has regularly failed to provide a level of investment, which would lead any kind of recovery, coupled with bullish behaviour in keeping its high trade surplus.

The interdependence of the Eurozone has become increasingly clear since the crises, and it was well understood that Germany maintaining its surplus had constrained the growth of the weaker Eurozone members. The German hopes were that this would still help drive growth, but shown through interdependence the German economy is slumping.

Continuing with the lack of surprises the European Central Bank informed us that the expected inflation for this year would be 0.5% with a forecast of 0.7% for 2015. The last target of the ECB that I can recall was that of inflation being 2%. Germany is clearly causing a whole host of trouble due to its economic weight on the Eurozone, but shows no insight into the potential change of policy as they are still predicting growth to rally to 1.6%. Jens Weidmann throws some spurious figures and he then claims to be surprised by a lack of performance, although nothing has been out of the ordinary for the past two years.

Moreover, it is clear that the only person in the ECB that needs more support is Mario Draghi. I would go as far as to claim that he is the Eurozone’s only hope, with his desire to pursue quantitative easing in a strategic and defined manner in aiding structural reform is essential. With an overall aim of returning the size of the ECB’s balance sheet to that of 2012. It is fair to state that asset purchases do not have defined results, but it would be an improvement in comparison to Weidman’s insistence on a more passive approach. I am not the biggest advocate of quantitative easing, and more in line with structural reform to European labor law and the ease of businesses, but I believe that Draghi is representing an interventionist mixture that will lead Europe to sustained and reliable growth.

It will be interesting to see how the year closes off and what 2015 has to offer in terms to tangible change in our approach to modern economies which no longer fall in line with some of the traditional approaches still used and insisted upon.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

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Moral Dilemmas, Choice, & Economics

We often delve into behavioural economics when looking for depth in microeconomics analysis. This ties in with moral dilemmas as it is all ultimately down to the choices we make. To start off the Heinz Dilemma and Hobson’s choice will be considered.

Heinz Dilemma

In the Heinz Dilemma Kohlberg suggests that there are always six possible approaches to any problem encountered. Consisting of obedience, self-interest, conformity, law-and-order, human right, and universal human ethics. There are a few examples of this dilemma, which are well known but I will be using the original example.

In the original example the story is as follows:

“In Europe, a woman was near death from a special kind of cancer. There was one drug that the doctor’s thought might save her. It was a form of radium that a druggist in the same town had recently discovered. The drug was expensive to make, but the druggist was charging ten times what the drug cost him to make. He paid $200 for the radium and charged $2,000 for a small dose of the drug. The sick woman’s husband, Heinz, went to everyone he knew to borrow the money and tried every legal means, but he could only get together about $1,000, which is half of what it cost. He told the druggist that his wife was dying, and asked him to sell it cheaper or let him pay later. But the druggist said, “No, I discovered the drug and I’m going to make money from if.” So, having tried every legal means, Heinz gets desperate and considers breaking into the man’s store to steal the drug for his wife.”

From this there are six choices that present themselves so Heinz. I am going to list them from the example so we can get to the economics of it:

  1. Heinz should not steal the medicine because he will be but in prison, meaning he is a bad person or Heinz should steal the medicine because it is only worth $200 and that is not how much the druggist wanted for it; Heinz offered to pay and has no intention to steal anything else. (Obedience Example)
  1. Heinz should steal the medicine because he will be happier if he saves his wife, even if he serves a prison sentence or Heinz should not steal the medicine because prison is awful and he would languish greater in jail rather than his wife’s death. (Self-Interest Example)
  1. Heinz should steal the medicine because his wife expects it and he wants to be a good husband or Heinz should not steal the drug because that is breaking the law, he is not a criminal and he has done everything in his power so is blameless. (Conformity Example)
  1. Heinz should not steal as it is illegal as described by law, or Heinz should steal the drug for his wife, take the punishment, and also eventually pay the druggist. (Law & Order Example)
  1. Heinz should steal the medicine because everyone has the right to live regardless of law or Heinz should not steal because of the druggists right to fair compensation. (Human Right Example)
  1. Heinz should steal the medicine as saving a human life is a more fundamental value than that of property right or he should not steal the medicine because others may need the medicine as desperately. (Universal Human Ethics)

Through considering the variety of choices we have various equilibriums. The question we might want to ask is which is the optimal scenario. One may quickly realise there is no obvious option if you take it from a moral standpoint, but if we take it from an economic perspective we can examine the marginal private benefit, marginal social benefit, marginal private cost, and marginal social cost. This is due to the decisions at times having an effect on a third party that is not involved in the original transaction (that is the choices present to Heinz considering the druggist). Moreover, we can consider the Pareto efficient equilibrium considering who will be better or worse off.

In the first part of the obedience scenario Heinz is not necessarily worse-off as his wife is going to die if he does nothing, and there can be no Pareto improvement, as it would involve the druggist no longer having the drug. Would society be better off if Heinz steals in order to save his wife’s life? Since the disease is rare and special we may assume there is no demand other than Heinz’s. However, in this justification we encounter the potential problem a pharmaceutical company may face. In that if they go about developing a special drug surely they deserve some kind of compensation other than benefitting society. This to an extent depends on one’s economic view, whether we care more about the individual or society.

In the third example giving us conformity, it would seem to be the neutral equilibrium if he were to do nothing as mentioned above. If he were to conform in a sense to his wife’s demands he is not conforming to the norms of society so we come back to the issue of whether we consider societies or the individuals’ welfare of greater importance. In the fourth example we may argue that law in any sense is restrictive, and should not be needed for society, because we should be able to provide a social framework that would create an understanding for these scenarios. What if Heinz steals the drug then pays the druggist, should he still go to prison? I would argue that there is no longer a need for the law stating he should go to prison provided he pays for the drug as he has enacted a social framework not requiring the law to be in place.

The fifth example brings up the issue we may find with patents. Does an innovator deserve compensation for his work through price setting power? In this case the druggist has enacted monopoly power by price setting. As the druggist charges $2,000 when it cost $200. Then we have the inelastic demand, as Heinz effectively needs the drug and has no other choices available. This is a clear abuse of power that is afforded to the druggist through property right, and is not increasing anyone’s welfare. The druggist could take the $1000 offered or take the payment in full later, but chooses to be bullish due to the position held.


 

Hobson’s Choice

This is a special case of take it or leave it choice, whereby there is a false perception of free choice between any good. Thomas Hobson who owned a 40-horse stable where customers hired the horses developed this theory. Seeing the 40-horse stable suggested the variety of choice available and the perception there was free choice, however the condition was that the horse nearest to the door of the stable was the option and the other option was to have no horse at all.

An ultimatum game is effectively a form of Hobson’s choice, taking the classic example of a pot of money being split by two people with one person the proposer and the responder, as the proposer gives a take it or leave it choice. Results in this game often depend on the type of society it is tested in. Below is an example chart of this trade-off, noting that people believe that a 50/50 split is fair:

Screen Shot 2014-12-03 at 00.56.39

In Hobson’s case this ensured that the best horse was not picked every time, allowing that horse to rest in order to maintain its condition, while forcing the user into a choice. This may mean that in the long-run there are better quality horses available for riding, however in the short-term the consumer has been mislead about the opportunities available. Therefore, it comes down to the quality of horse presented to them at the door as to whether they take it or leave it.

Sources:

Kohlberg, Lawrence. The Philosophy of Moral Development: Moral Stages and the Idea of Justice. San Francisco: Harper & Row, 1981. Print.

Graph:

COREECON PROJECT

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